Required for good internal controls:
1) Deposit checks daily
2) Separate authorization of the purchase and the payment
3) Use pre-numbered checks and account for each one
4) Reconcile bank statements monthly

Bank Reconciliation: Compare the ending cash balance in the company’s general
ledger cash account to the ending cash balance on the bank statement

Should be done at the end of each month

The bank statement will not agree to the general ledger balance because of
timing differences related to receipts and payments and the fact that the
company waits to record some items until they know the amount on the
bank statement.

The general ledger cash account will record each month:

1) Checks written
2) Deposits

The bank statement will show the following transactions each month:

1) Checks that have cleared and been paid
2) Deposits that have been added to the account
3) Checks that did not clear (bounced) NSF checks
4) Bank fees
5) Interest earned
6) Automatic withdrawals and deposits

The difference in the cash account and the bank statement will be accounted for by
the items that are on one account/statement and not on the other or errors made.

Items the bank has recorded - company has not yet recorded in the cash account:
1) Non sufficient funds check
2) Bank fees and service charges
3) Interest earned
4) automatic deposits and withdrawals

These items are listed in the cash account column on the reconciliation

Items recorded in the cash account – the bank has not yet recorded
1) Outstanding checks
2) Deposits in transit

These items are listed in the bank column on the reconciliationTerms to Know:

Outstanding Checks: Checks written by the company, not yet cleared by
the bank and not deducted from the bank balance.

Compare the checks written by the company to the checks that are
cleared on the bank statement – those not cleared on the bank
statement are called “outstanding checks”

Deposits in Transit: Deposits sent to the bank, not yet added to the account
by the bank.

Compare the deposits made by the company to the deposits that are
recorded by the bank – those not on the bank statement yet are
“deposits in transit”

NSF Checks – “non sufficient funds” - a bounced check that was not deposited
to the company’s account because the funds were not available.
The accounts receivable was not really collected

Completing the bank reconciliation:

Set up two columns – one for cash account and one for the bank

Start with the ending balance for the month for each

In the “cash” column – put the items the bank knows about and recorded
that the company has not yet recorded

In the “bank” column – put the items the company knows about and
recorded that the bank has not yet recorded.

1) Outstanding checks
2) Deposits in transit

Record any error made by either party; put the error fix in the column of the one
who made the error

Total the two columns to get the adjusted ending balance – The two columns
will agree when you have accounted for all the differences

A journal entry must be made for items in the “cash column” that have not yet been recorded:

1) Negative items are a credit to cash
2) Positive items are a debit to cash
3) NSF checks are a debit to accounts receivable
4) Automatic deposits credit whatever the money was received for
5) Automatic payments debit whatever the money was paid for

Do not put items in the bank column in the journal entry
Record only the amounts you put in the cash column in the journal entry

All material on this web site is copyrighted and the exclusive property of the author. It may not be reproduced or distributed in any form without prior written permission from the author.